Economic Quarterly

Spring 2005

What Difference Would an Inflation Target Make?

Critics of an explicit inflation target argue that it would require additional fluctuations in real output and unemployment. I argue that theory and practice have shown this alleged dilemma to be a false one. However, an inflation target would demand more communication. The Fed would need to place an inflation target in the context of a policy rule that explains the strategy for achieving it. It would also need to communicate a model of the economy that clarifies the tradeoffs faced by monetary policymakers.